Thoughts On Geoff Considine's Model ETF Portfolio

by: Roger Nusbaum

Roger Nusbaum submits: Posted earlier today on ETF Investor was a portfolio put together by Geoff Considine using Monte Carlo Simulation. Geoff's idea is a spin on David Jackson's portfolio.

I'll toss up my usual disclaimer that all portfolios like this have flaws. Anything along these lines that I might try would have flaws too. Flaws themselves don't have to be a problem but not knowing what they are could be. I realize the portfolio adds up to more than 100%. [Editor: Thanks for catching my error in transcribing Geoff's allocation, Roger. It's now been corrected -- with a credit to you! -- David.]

The energy weight is colossal at 26.96% (all of these numbers are from Morningstar) compared to 10.29% in the S+P 500, utilities have a 13.76 weight compared to 3.6% in the S+P 500. Tech is very underweight vs the market. The yield is 2.41% which is above the market yield but not that high when you consider that 30% is in bonds and 10% is in REITs.

I am as bullish on energy as anyone, I think, but there is no way I would overweight it by 16 percentage points, not even close. I think there are fundamental drivers for energy so I am overweight. I don't think there are necessarily any fundamental drivers for utilities to outperform the market again, tripling up on the benchmark weight is very extreme. I am very close to equal weight (just a hair over) utilities because I want the yield but I do not think the sector will beat the market by the roughly 8% it did in 2005.

I would also note that the median cap size of the portfolio is $14 billion. That is fairly small. Small could continue to lead but it is worth knowing that the run of large cap lag is very long in the tooth by historical standards.

The other thing is no emerging market exposure, I don't think EFA really have enough to matter. I have not paired back my exposure for clients but it is possible that pairing back is the right trade ( to be clear I don't think it is but I could be wrong). Almost ignoring an asset class could be a big mistake, at least it is today.

I am quite sure that all of the things I pointed out are easily justified by Mr. Considine but this is just how I see the portfolio.